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EXcess Idle Time

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  • Federico M. Bandi
  • Davide Pirino
  • Roberto Renò

Abstract

We introduce a novel economic indicator, named excess idle time (EXIT), measuring the extent of sluggishness in financial prices. Under a null and an alternative hypothesis grounded in no‐arbitrage (the null) and market microstructure (the alternative) theories of price determination, we derive a limit theory for EXIT leading to formal tests for staleness in the price adjustments. Empirical implementation of the theory indicates that financial prices are often more sluggish than implied by the (ubiquitous, in frictionless continuous‐time asset pricing) semimartingale assumption. EXIT is interpretable as an illiquidity proxy and is easily implementable, for each trading day, using transaction prices only. By using EXIT, we show how to estimate structurally market microstructure models with asymmetric information.

Suggested Citation

  • Federico M. Bandi & Davide Pirino & Roberto Renò, 2017. "EXcess Idle Time," Econometrica, Econometric Society, vol. 85(6), pages 1793-1846, November.
    • Handle: RePEc:wly:emetrp:v:85:y:2017:i:6:p:1793-1846
    DOI: 10.3982/ECTA13595
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    Cited by:

    1. Giuseppe Buccheri & Davide Pirino & Luca Trapin, 2021. "Managing liquidity with portfolio staleness," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 215-239, June.

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